Reporting on wider value creation
Wider value creation
We have identified six principles of trust that individually and collectively contribute to corporate trust. They are linked, interdependent and essentially all rooted in long-term thinking, planning and preparedness. This article relates to the principle of ‘Wider value creation’ which looks at communicating the full range of value created and the actions taken to manage, sustain, and develop these sources of value will make a company appear better prepared for the future.
The following is a chapter from our annual ‘Complete 100’ research titled ‘Less Perfection. More Authenticity’ which analyses the corporate reporting trends of the FTSE 100. Our 13th edition finds more authenticity and credibility in reporting is required to build trust among stakeholders. Request the full report here.
Why report on wider value creation?
Ocean Tomo’s much referred to study on Intangible Market Asset Value4 shows that much of a company’s true value never shows up in the financial statements. This is largely because accounting systems are still best suited for providing information about tangible assets despite the fact that business investment in intangible assets far exceeds investments in traditional tangible assets.
Companies are increasingly attempting to take a broader view of value and set out their wider value creation story in the strategic report covering the intangible as well as tangible value they create. However they often struggle with making it truly strategic. This means presenting a coherent story throughout the report that really bridges the gap between the strategic report and the financial statements, and highlights the strategic importance of the relationships, resources and other dependencies that are necessary for the success of the business.
Sources of value may include brand, natural resources, R&D, intellectual capital, licences, patents or others. Companies who are able to truly communicate their full range of value and the actions they take in order to manage, sustain and develop these future drivers of value are the ones that will be able to gain the trust of investors and other stakeholders because they will come across as agile, reflective and well prepared for the future.
The proposed Guidance on the Strategic Report also has a much wider definition of value and will require companies to consider both their tangible and intangible assets going forward. In particular, those that have not been reflected in the financial statements. Companies would fare well by seeing this as an opportunity to develop their thinking around value drivers and to use it to expose unrecognised assets highlighting their unique investment case.
How the FTSE 100 reported in 2017
Reporting on the wider value creation story is an area that has seen smaller but often very significant changes this year. 66% of companies now take a wider value creation approach to their business model which is slightly up compared to last year. However, this represents a substantial shift in thinking over a four year period with an increase of 175% from 2013 Annual Reports to now. Business models that take a value creation approach are characterised by having a focus on demonstrating the resources and relationships the company depends on to create value, and will often discuss value beyond financial returns including the value delivered to wider stakeholders. This is a central element in the wider value creation story because – when executed well – it introduces elements to the value creation story that typically cannot be captured on the balance sheet.
Almost two thirds of companies also discuss creating value for wider stakeholders outside of the business model, typically through leadership statements and general messaging throughout the report. A development which supports this trend.
Another early but significant development is that almost 20% of companies discuss long-term value creation considerations in their investment case. This is important because many of these considerations represent intangible value such as R&D pipelines, relationships with key stakeholders like regulators and investment in proprietary technology, and means companies are finding new avenues to explain their full value creation story.
Revealing the stocks of capitals a company depends on to create value also exposes areas that may not be discussed well elsewhere in the Annual Report. Such practice could potentially illustrate underexposed risks to the value creation process. Interestingly our research this year shows that there has been quite a lot of movement in terms of linking risk and business model (53% now do this, up from 30% last year) and linking risk and strategy (86% now do this, up from 63% last year). This could simply be a reaction to recent corporate failures in this regard but will stand companies in good stead going forward as the proposed Guidance on the Strategic Report has an enhanced focus on risk in relation to companies’ ability to generate and preserve value.
This is a chapter from our annual ‘Complete 100’ research titled ‘Less Perfection. More Authenticity’ which analyses the corporate reporting trends of the FTSE 100. Request the full report here.
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